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Euro Hit By Moody’s Warning Shot, Sterling To Face 2Q GDP Report

Euro Hit By Moody’s Warning Shot, Sterling To Face 2Q GDP Report

2012-07-24 12:00:00
David Song, Strategist
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Talking Points

  • Euro: Moody’s Cuts Credit Outlook, Spain’s 10-Year Yield Hits Record-High
  • British Pound: Range At Risk As 2Q GDP Is Expected To Contract 0.2%

Euro: Moody’s Cuts Credit Outlook, Spain’s 10-Year Yield Hits Record-High

The Euro slipped to a low of 1.2083 as Moody’s Investors Service lowered its Aaa credit rating outlook for Germany, the Netherlands and Luxembourg, while the yield tied to Spain’s 10-year debt rose to a euro-record high of 7.598% amid the ongoing turmoil in the financial system. As European policy makers struggle to stem the heightening risk for contagion, the single currency remains poised to face additional headwinds in the coming days, and we should see the downward trend in the EURUSD continue to take shape as the fundamental outlook for the region turns increasingly bleak.

In turn, we will maintain our bearish forecast ahead of the European Central Bank interest rate decision on tap for the following week, and the single currency may trade heavy going into the policy meeting as interest rate expectations deteriorate. A survey by Bloomberg News shows 14 of the 15 economists polled expect the ECB to keep the benchmark interest rate at 0.75%, while market participants continue to see an 83% chance for a 25bp rate cut according to Credit Suisse overnight index swaps. Nevertheless,we are still looking for fresh 2012 lows in the exchange rate as the region heads for a prolonged recession, but we will be keeping a close eye on the relative strength index as it flirts with oversold territory. If the oscillator push below 30, we should see the EURUSD continue to give back the rebound from December (1.1875), but a rebound from the current level could pave the way for a short-term correction in the euro-dollar as it holds within the previous day’s range.

British Pound: Range At Risk As 2Q GDP Is Expected To Contract 0.2%

The British Pound pared the sharp decline from the previous day, with the GBPUSD climbing to a high of 1.5534, but the sterling may struggle to hold its ground over the next 24-hours of trading as the economic docket is expected to show a deepening downturn in the U.K. Indeed, the advanced GDP report is expected to show economic activity contracting another 0.2% in the second quarter, and the weakening outlook for the region may fuel bets for additional monetary support as the Bank of England keeps the door open to expand the balance sheet further. As a result, we may see the GBPUSD threaten the range-bound price action carried over from the previous month, and we may see the pair give back the rebound from June (1.5267) should the growth report fuel bets for more QE.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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